WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE

Greek Yields A Harbinger of Things to Come?

Last week, 5 of the 8 risk measures we track registered positive readings on a week-over-week basis, while two were negative and one was neutral. An growing risk worth noting is Greece. As we highlight below, Greek 10-Year Bond Yields (the measure we track) are nearing their all time highs set before the EU bailout announcement. This may be a harbinger of a revisit of the Sovereign debt crisis from April through June of this year. As such, we would advise investors to keep close track of this metric going forward, as a break to new highs in the underlying (CDS is already at new highs) could snowball. Remember, it was the breakdown in Greece that triggered the global risk-off trade just a few months ago.

8. Markit MCDX Index Monitor– The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices. Spreads rose last week, closing at 218 versus 225 the prior week. Conclusion: Positive.

Joshua Steiner, CFA

Allison Kaptur

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09/07/10 08:19 AM EDT

THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - September 7, 2010

As we look at today’s set up for the S&P 500, the range is 20 points or 1.59% (1,087) downside and 0.23% (1,107) upside. Equity futures are trading lower tracking a mixed close in Asia and weak trade in Europe as concerns over the state of the European banking sector keeps investors cautious.

Air Products & Chemicals boosted hostile takeover bid for Airgas by 3% to $65.50 in cash and said it will walk away unless ARG shareholders support its proposals at meeting next week

Watch CLF, BTU, NEM, CDE after Australia’s Julia Gillard won support to form govt. (Rio Tinto, BHP Billiton both down at least 0.9% in London)

Asian markets ended mixed ahead of key August data from China expected later this week.

Bank of Japan keeps overnight call rate target unchanged at 0.1%

Australia leaves cash rate unchanged at 4.5%

EUROPE

FTSE 100: (0.70%); DAX (0.54%); CAC 40 (0.95%)

Major European indices are trading lower on concerns about the state of the region’s banks following a WSJ report that European stress tests understand holdings off risky government debt.

A report from the German banking association that the 10 biggest banks in the country may need €105B worth of additional capital.

Healthcare and Food & Beverage are the only two sectors higher.

Howard Penney

Managing Director

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09/07/10 07:57 AM EDT

Accept Uncertainty

“For my part I know nothing with any certainty, but the sight of the stars makes me dream.”

-Vincent van Gogh

Back to the grind this morning. I’ll try to kick things into gear by keeping this tight. I’ll start where I always do, utilizing real-time market prices and the governing principles of chaos theory in our macro models. Managing risk in this increasingly interconnected global marketplace always starts with accepting uncertainty.

Chief of the Reserve Bank of Australia, Glenn Stevens, had this to say overnight as he kept Aussi rates unchanged at 4.5%:

“With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate for the time being.”

Crisp, concise, and the to the point. To be sure, saying “somewhat uncertain” was pointed directly at Ben Bernanke who calls today’s global economy “unusually uncertain.” Altogether, global risk managers and central bankers alike should simply accept uncertainty in what it is that they do.

While I’m not certain about what it is exactly that Bernanke does in managing multi-factor and multi-duration global macro risk every day, I am certain about what it is that Congress does whenever they have an economic problem to solve for – spend.

Taking President Bush’s lead in increasing government spending, President Obama introduced another $50 BILLION in stimulus spending over the long weekend. This isn’t a political point – it’s a mathematical one. As you increase the numerator (spending) and the denominator continues to shrink (GDP), the ratio of US deficit/GDP goes up.

While there was some sort of sadistic fanfare associated with a 9.6% unemployment rate in this country being “better than expected” on Friday, we are going to look at the current intermediate term TRENDS in both US employment and consumption for what they are and we’re going to cut our US GDP growth estimate from 1.7% for Q3 to 1.3%.

What are the main macro signals in the US marketplace that continue to flash slowing growth?

US Currency – the US Dollar was down last week for the 12th week of the last 14, losing another -1.1% of its uncertain value as the world’s reserve currency. Perhaps the President’s plans for additional stimulus leaked into week’s end. You tell me.

US Bond Yields – after rising from its YTD lows last week, the interest rate on 10-year US Treasuries are falling again this morning back down to 2.65%. Notwithstanding that our intermediate term TREND line of resistance remains much higher (up at 3.01%), the reality here is that the bond market doesn’t lie about US GDP growth; politicians do.

US Equities – after a big rally from oversold lows (we covered most of our short positions between August 24th and 25th walking through the math associated with the 1040 level being an important level to book gains on the short side), the SP500 remains bearish from an intermediate term TREND perspective. Our Bear Market Macro line in the sand remains 1144, and we have immediate term TRADE resistance at 1107.

This isn’t to say that there aren’t other countries, currencies, and commodities in this world that won’t do well in this uncertain macro marketplace (after being bearish on them for the first half of 2010, we are long Chinese equities via the CAF). This is simply an opportunity to recognize that there is nothing “unusual” about how currency, bond, and equity markets in the US are correlating.

What could change our view that US GDP growth is slowing?

Weekly Jobless claims dropping, sustainably, below 390,000.

Weekly MBA mortgage applications showing some semblance of a demand signal for US Housing (as opposed to the lowest levels of demand since 1997).

Weekly price performance of US currency, US Treasury bonds, and US stocks changing their intermediate term TRENDS for at least 3 consecutive weeks.

What could change our call for American Austerity (Q3 Hedgeye Macro Theme)?

Slowing US government spending

Accelerating US GDP growth

Unfortunately, despite the “sight of the stars” of the northern lights last week, I am certain that I see neither government spending nor growth in America changing their respective bearish paths this morning.

Best of luck out there today,

KM

Keith R. McCullough Chief Executive Officer

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STILL EARLY BUT SLOWDOWN CONTINUES

We’re only a week in but the numbers continue to look soft, at least relative to the recent scorchers.

Our sources indicate that through the first five days of September, Macau table revenues were HK$2.27 billion. Taking into account that the first 5 days include a full weekend, it projects out to around HK$14 billion including slots, or a little over 30% growth.

Of course, it really isn’t that useful to make projections after only 5 days but we did it anyways. We do believe that September will be a slower grower. The initial data seems to confirm this and our peeps on the ground are indicating that the gaming floors are noticeably less busy than they were in mid-August.

The market shares are all over the place as can be seen in the following table. Wynn is holding near its reduced August level of 14%. LVS must’ve gotten nailed on the VIP tables as its share fell all the way to 13%. Most interesting is MPEL, up over 20%. Still way too early, but if MPEL can generate a third straight month of market share gains, we doubt the stock would retain a four handle for very long. Poor MGM. Not much else to say there.

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09/03/10 03:09 PM EDT

Should US government debt be rated junk?

The Week Ahead

The Economic Data calendar for the week of the 6th of September through the 10th of September is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

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